Justice Wants Banks To Be Quasi Cops

by: January 1, 2013

Every year, banks handle tens of millions of transactions. Some of them involve drug money, or deals with companies doing secret business with countries like Iran and Syria, in defiance of trade sanctions.

But if the Justice Department has its way, banks will be forced to change — to spot illegal transactions and blow the whistle before any money changes hands.

Federal prosecutors have already collected more than $4.5 billion from some of the world’s biggest financial institutions — banks charged with looking the other way when dirty money passed through their accounts.

Sen. Carl Levin, D-Mich., spent two years investigating many of those shady deals.

“Wrongdoers can use U.S. dollars and U.S. wire transfers to commit crimes, arm terror groups, produce and transport illegal drugs, loot government coffers and even pursue weapons of mass destruction,” Levin said at a congressional hearing last year.

Assistant Attorney General Lanny Breuer says stopping these kinds of crimes is the goal of the Justice Department’s new push against money laundering.

“Certainly one of the things we want to do is not just put criminals in jail, but we want to take away their ill-gotten gains, and we don’t want to permit them to use our financial institutions to hide the money that they have stolen,” Breuer says.

The Justice Department is relying on a law called the Bank Secrecy Act. It requires financial institutions to be on the lookout for sketchy transactions. That law is 40 years old, but prosecutors just recently put more energy into enforcing it.

“Willie Sutton, the bank robber … they asked him why does he rob banks, and he said, ‘Because that’s where the money is,’ ” says Eugene Ludwig, who led the Office of the Comptroller of the Currency in the Clinton years. “And so, why does the banking industry get involved in this? And it’s because money flows go through banks.”

Banks like HSBC, a British bank that agreed a few weeks ago to pay nearly $2 billion to settle money laundering allegations. Another British bank, Standard Chartered, was accused of handling money for companies tied to regimes in Iran, Sudan and Libya. Standard Chartered coughed up more than $200 million to settle those charges last month.

Then, there’s the financial service known as MoneyGram, which recently forfeited $100 million for overlooking widespread marketing scams by its agents. Prosecutors said the scam artists preyed on senior citizens and other vulnerable people; 25 agents have been charged with crimes in that case.

But Ludwig, who now consults for banks at the Promontory Financial Group, says prosecutors and bank regulators can’t catch all the fraud, so they’re depending on the banks themselves to do a better job.

“Banks are not set up historically really to be kind of quasi law enforcement enterprises, which is really what the U.S. government’s asking of them,” he says.

Every time a financial institution makes a fix, criminals try to work around it. Ludwig calls it a cat-and-mouse game. “Fair or not, it’s what the government is demanding of our enterprises, and everybody has to face up to that reality, I think,” he says.

There’s another important reality, says Tom Perrelli, a former Justice Department official, who recently went back into private law practice at the firm Jenner & Block.

“This area is similar to the Foreign Corrupt Practices Act, which has been an area of focus for the Justice Department for some time,” Perrelli says.

Like the FCPA, which spawned a cottage industry for law firms, the Bank Secrecy Act and other money laundering laws “are areas where companies can unquestionably comply with the law, but it requires training and some constant supervision over personnel all across the world,” Perrelli says.

If banks are going to comply, Perrelli says bankers and their lawyers are going to have to do a lot more work this year.